Wall Street Close: Major indices drop as retail darlings pop, short-seller agony continues

US stock markets saw substantial downside on Wednesday, with the S&P 500 dropping 2.6% and falling below 3750, the Nasdaq 100 dropping 2.8% and the Dow dropping 2.1%. No specific headline or theme was behind the downside moves, though numerous analysts have been expressing increased concern about potential stock market overvaluation that might be triggering profit-taking, with stocks still fairly close to record high levels.

Overvaluation concerns in the broader market are not being helped by the ongoing parabolic moves being seen in small cap/hedge fund most shorted stocks; GameStop was up another 134.8% on the day as the reddit retail army, which coordinates itself on sub-reddit WallStreetBets, continued to pump the stock. Other retail darling stocks also saw significant upside. Some market commentators suggested that Hedge Funds with short-positions in stocks such as GameStop who had not yet closed out their positions by buying the stock are likely to have faced margin calls in order to keep their short positions open; in order to meet these margin requirements, they might have sold profitable long positions, something which might have weighed on the broader market.

David Madden, market analyst at CMC Markets UK told Reuters that "fears are circulating that some investment funds might be quickly closing out positions as a way of shoring up their cash… It is early days yet but we might see selling pressure ramp up for fear there could be a stampede for the exit.” Elsewhere, a number of retail trader focused brokerages saw outages amid the high volumes and this was also cited as a downside catalyst for the market.

With the ongoing short-squeeze of epic proportions stealing the limelight again on Wednesday, less attention than usual was paid to this month’s Fed meeting; the bank held policy settings on hold as expected and largely stuck to the script of recent commentary (i.e. Fed Chair Jerome Powell pushed back on the notion of any imminent tapering of asset purchases).

Large Cap Earnings

Apple is about 1% lower in aftermarket trade despite a very strong Q1 2021 earnings report; earning per share came in at $1.68, above forecasts for $1.41 and quarterly revenue was $111.4B, well above expectations for $103.28B. iPad, iPhone, Mac, Wearables/Home/Accessories and Services sales all beat expectations. Apple CEO Tim Cook noted that demand for new Macs and iPads had been very strong and said he is very optimistic about the growing services business. Sales in China were also strong.

Facebook earnings were also better than expected and FB shares are up 1.5% in aftermarket trade; earning per share came in at $3.88 versus expectations for $3.21, quarterly revenue was $28.1B versus expectations for $26.41. Meanwhile, Tesla earnings were more mixed; earnings per share underwhelmed at $0.80, below the expected $1.01, but quarterly revenue was stronger than expected at $10.7B (versus forecasts for 10.32B). TSLA shares are lower by 3.2% in after-hours trade.